Retesting Highs

1/11/2012 8:46:38 AM

Step 2 in the process of setting a top.

Just so we're clear, yes - I am looking for a top here but I will give the market more room at tops when there's a chance they could continue. So we remain in Buy Mode, but cautious. If you're trading, it's important to be bullish, but cautious.

Tuesday's trade was somewhat bearish. While the markets were up, they did reverse and the S&P is at a critical level. It's important to understand that a break above this level could give the markets a liquidity burst and we'd simply extend our call further into next week, which is options expiration.

On the economic front, here is the schedule for this week. Pay close attention to the timing of the report and the potential for the markets to make short term reversals at those points.

On to the charts:

Stock Barometer Analysis

The barometer remains in Buy Mode. I still see a continuation of the move higher into early to mid January. 1/12 is our next key reversal date. Note the following week is options expiration. Sometimes markets can hang up into expiration.

The Stock Barometer is my proprietary market timing system. The direction, slope and level of the Stock Barometer determine our outlook. For example, if the barometer line is moving down, we are in Sell Mode. A Buy or Sell Signal is triggered when the indicator clearly changes direction. Trend and support can override the barometer signals.

Money Management & Stops

To trade this system, there are a few things you need to know and address to control your risk: • This system targets intermediate term moves, of which even in the best years, there are usually only up to 7 profitable intermediate term moves. The rest of the year will be consolidating moves where this system will experience small losses and gains that offset each other. • This system will usually result in losing trades more than 50% of the time, even in our best years. The key is being positioned properly for longer term moves when they come. • Therefore it is vitally important that you apply some form of money management to protect your capital. • Trading a leveraged index fund will result in more risk, since you cannot set stops and you cannot get out intraday.

Accordingly; • Make sure you set your stops so that you can lose no more than 2% per trade (based on the QQQQ if you're trading leveraged funds and options with our trading service).

Potential Cycle Reversal Dates

I am bullish into 1/12. What would be ideal is a market that peaks into 1/12, then turns lower into the 26th. I'd like to grab both those moves.

My Additional timing work is based on numerous cycles and has resulted in the above potential reversal dates. These are not to be confused with the barometer signals or cycle times. However, due to their past accuracy I post the dates here.

Timing Indicators

Use the following Timing/momentum indicators to assist in your trading of the QQQQ, GLD, USD, USO and TLT. They are tuned to deliver signals in line with the Stock Barometer and we use them only in determining our overall outlook for the market and for pinpointing market reversals. The level, direction, and position to the zero line are keys in these indicators. For example, direction determines mode and a buy signal 'above zero' is more bullish than a buy signal 'below zero'.

QQQQ Timing Indicator (NASDAQ:QQQQ)

The QQQQ Spread Indicator will yield its own buy and sell signals that may be different from the Stock Barometer. It's meant to give us an idea of the next turn in the market.

Gold Timing Indicator (AMEX:GLD)

Want to trade Gold? Use our signals with the Gold ETF AMEX:GLD. Gold gives us a general gage to the overall health of the US Economy and the markets.

US Dollar Index Timing Indicator (INDEX:DXY)

Want to trade the US Dollar? Use our signals with the Power Shares AMEX:UUP: US Dollar Index Bullish Fund and AMEX:UDN: US Dollar Index Bearish Fund.

Bonds Timing Indicator (AMEX:TLT)

Want to trade Bonds? Use our signals with Lehman?s 20 year ETF AMEX:TLT. The direction of bonds has an impact on the stock market. Normally, as bonds go down, stocks will go up and as bonds go up, stocks will go down.

OIL Timing Indicator (AMEX:USO)

Want to trade OIL? Use our signals with AMEX:USO, the OIL ETF. We look at the price of oil as its level and direction has an impact on the stock market.

Secondary Stock Market Timing Indicator

We daily monitor hundreds of popular and proprietary technical indicators that break down market internals, sentiment and money flow to give us unique insight into the market. We feature at least one here each day in support of our current outlook.

As an annual subscriber to any of our premium services, you also get access to all our charts and research. Email Carl@stockbarometer.com to upgrade and also save 20% on your subscription.

Daily Stock Market Outlook

We remain in Buy Mode, looking for the markets to move higher into January 12th. The next dates after that take us into expiration. I see a move lower into 1/27 and then a pop at the end of the month.

The above chart shows Investor's Intelligence's Bulls minus Bears. I use this as a big indicator of market sentiment. To me, level and direction are important. It's been trying to reverse, but unable to do so. That's bullish. So this has me bullish, even though it's getting extended. Remember, the market moves in whips where the moves can be most violent at the end.

Here's a chart of Nasdaq Cumulative Breadth with a 34 period moving average. Generally, above this level the indicator is bullish. The issue with the market here is that the breadth has been narrow. But it can extend higher here. Much higher. That's one reason we're only seeing new highs in the 100's. A broadening of the market will cause a nice additional advance - maybe not so much on the indices, more so in individual stocks.

I monitor a ton of data. Here's a view of options volume. Markets tend to reverse at peaks. It's interesting to note when call volume is increasing relative to put volume and vice versa. This suggests a window for a top between now and next Friday.

If you want to learn more about some of my models, I use my blog to cover them in more detail.